L.L. Bean Case Study Solution

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Case Report: L.L. Bean 1. How does L.L. Bean use past demand data and a specific item forecast to decide how many units of that item to stock? L.L. Bean uses three steps to calculate determine the number of units of a particular item it should stock, both for a new item or a never out item. The first step is to detect a “frozen forecast” for the item in the future period which from the forecasting department, and is based on the book forecast and past demand data. The forecast is then used together with the historical forecast errors, namely the A/F ratios. These consider an individual item’s past season’s forecast and actual demand. By calculating the A/F ratio, L.L. Bean estimates the range of inventory that the product will be in the upcoming season after converting the point forecast into a demand distribution. For instance, if there was a 50 percent chance that the forecast errors for last season were between .6 and 1.6, then the same distribution would occur in the future period. If in this case the “frozen forecast” (point forecast) would be 1000 units, then with probability of 50 percent the stock amount to order this item would be between 600 and 1600 units. The last step in forecasting demand is to find the service level based on a profit margin calculation. Thus L.L. Bean considers the contribution margin in case an item is bought versus the liquidation costs spent if the item is not demanded. They can then use this to calculate the critical ratio (fractile) (costs of understocking relative to the sum of costs of both understocking and overstocking), which describes the item’s probability distribution of demand. The critical ratio calculation must be done so that L.L. Bean knows at what point it is optimal to hold the stock in order to balance overstocking and understocking costs. Finally, the critical ratio is combined with the corresponding

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